India is becoming a focus for real estate investors. They are tuning into the fact that one in six of the worldâs population lives in the country and its economy is powering ahead; real GDP is expected to grow by 6% a year over the next decade.

India’s property market is scrambling to cater for this growth. Over the next five years, the country needs to build 55 million sq ft of offices, 600 shopping centres and up to 10 million units of housing annually, according to a report by Rreef Research, owned by Deutsche Bank.

“With the Indian economy growing strongly, the demand for office, retail and logistics space is set to expand significantly. We think the total commercial stock has the potential to grow by $66bn (€51bn) in the next five years to $ 366bn,” said the report.

It is these numbers that are pulling in the likes of the big US investors like Morgan Stanley, which recently paid $68m for a minority share in Indian developer Mantri, while GE has put $63m into a fund run by Ascendas, a Singapore-based developer. Private equity group Blackstone and Goldman Sachs’ Whitehall fund are also thought to be sniffing round for deals.

The gates of India opened for foreign investors last year when the government eased restrictions on participation in development. Foreign developers may run wholly-owned Indian subsidiaries if they invest $10m and foreign companies can build commercial and residential projects as long as they involve a sufficiently substantial sum. It is only real estate investments that do not involve developments that are restricted.

It is not only the big American funds that have headed east. UK investor Reit Asset Management established its foothold in India six months ago, opening an office in Mumbai. The company has expanded to Europe and Israel in its search for new markets.

Kevin McGrath, chief executive, said: “We saw India as an opportunity. It’s hard work but we’re happy. There’s no doubt there’s the potential in India. It’s just a question of whether we can realise it.”

Reit Asset Management has teamed up with a local partner to develop 120 acres in the western state of Maharashtra, near India’s historic city of Pune. The project will be worth $150m and initially provide about 2,000 homes, with substantial commercial space to follow. This is a departure from Reit Asset Management’s usual beat, which is focused on intensively managed, low-risk property.

“In India, there are restrictions and there isn’t a sophisticated investment market yet, so we are being drawn into development and residential development. Our goal, as the market opens, is to hold a large commercial property portfolio. But we need the restrictions to be lifted – that will happen,” said McGrath.

Partnering with a local participant is vital for foreign investors, according to the Rreef report. It is difficult to find suitable product and the market is not transparent. “We’re trying to find good partners in different regions of India and get close to them. We’d like good, medium-sized developers that need the support of a large, financial property partner,” said McGrath.

Sameer Sain, a former Goldman Sachs wealth adviser, recently left the US bank to start a career in Indian private equity and real estate in partnership with local retailer Pantaloon.

Alastair King, chief executive of Eredene, said: “We have a strong partner and feel we can get strong internal rates of return on our investment there, better than we can do elsewhere.”

The company recently raised £57m (€83m) through a conditional placing. “We thought it much better to raise a modest amount of money and show that we can deploy it. That’s the big difficulty. It’s difficult to get into these plum deals,” said King.

Eredene will rely on Saffron to find, evaluate and transact its investments. “We are finance providers; our typical deal will be 50:50 with a local partner,” said King. The company is looking at development projects in two or three Indian cities.

“Over the next five years, development will be in tier two and three cities, where there is a good university to service demand for qualified labour from multinationals – places like Mysore, Kochi, Amanhanbad and Pune,” said King.

Rreef Research said the rapid rate of urbanisation was straining India’s tier one cities of Delhi, Mumbai and Bangalore. Moreover, the influx of foreign companies outsourcing IT services has driven up office rents sharply in Mumbai and Bangalore. Competition for highly qualified technical staff is cut-throat and wage inflation rampant.

These pressures are leading to above-average expansion in smaller cities.

“Tier two and tier three cities may catch up, particularly in IT outsourcing. These cities are benefiting from the marked price increases in tier one cities’ office markets. In tier one cities, prices have been rising faster than rents and this is not likely to end in the near future,” said the report.